Editor’s note: HP’s (NYSE: HPQ) 2Q15 financial results disclosed Thursday reveal significant challenges within its businesses, and its ongoing realignment to adapt to changes in the global PC and data center markets is contributing to short-term execution challenges, writes Stehpen Belanger, an analyst at Technology Business Research.
HAMPTON, N.H. – HP’s 2Q15 financial results reveal significant challenges within its businesses, and its ongoing realignment to adapt to changes in the global PC and data center markets is contributing to short-term execution challenges.
The vendor’s Personal Systems Group (PSG) was pressured by extended PC lifecycles and weak global PC demand. HP’s Enterprise Group was faced with low competitor pricing, hardware commoditization and customer adoption public cloud solutions for a wider range of workloads. These factors contributed to HP’s corporate revenue decline of 8% year-to-year to $25.3 billion in 2Q15.
Personal Systems Group (PSG) revenue declined 13% year-to-year, as extended PC lifecycles and deferred purchases ahead of the release of Windows 10 caused consumer PC revenue to decline 22% over the same period. EG revenue increased 2%, highlighted by Industry-Standard Server (ISS) and networking growth of 8% and 22%, respectively.
TBR attributes ISS revenue growth to HP’s Gen9 portfolio transition, while networking revenue growth was driven by its recent purchase of Aruba Networks. HP’s storage revenue declined 2% year-to-year due to weak traditional storage demand, which caused converged storage revenue to account for more than half of HP’s total storage revenue for the first time.
HP’s operating margin was down 50 basis points year-to-year to 4.8% of revenue, as HP did not reduce spending enough to offset top-line declines and subsequent gross margin pressure.
TBR believes HP’s 2Q15 expense structure was pressured by its pending corporate split, as the vendor invests in its portfolio and sales strategies to accommodate changes in the data center and computing devices markets. As of Aug. 1, HP officially began operating as two separate companies, Hewlett Packard Enterprise and HP Inc., which will finalize with the new fiscal year on Nov. 1. In 2Q15 HP announced its post-split board of directors and took advantage of its split to add a diverse range of members that bring unique skills and backgrounds.
HP drops EVO:RAIL to hone focus on StoreVirtual
HP is targeting pockets of demand in the global data center market such as hyperconverged platforms to grow EG revenue. The vendor recently altered its hyperconverged platforms strategy with its decision to stop selling its EVO:RAIL hyperconverged product as of July 15, 2015. TBR believes HP originally expanded its partnership with VMware in October 2014 to launch an EVO:RAIL appliance to remain competitive with major OEMs such as Dell, EMC and Fujitsu that also joined VMware’s EVO:RAIL program.
However, following weak EVO:RAIL sales in 2015, HP has decided to focus solely on its line of ConvergedSystem (CS) hyperconverged appliances featuring HP’s StoreVirtual technology. The vendor is uniquely positioned as it the only major OEM to offer hyperconverged solutions based entirely on its own technology, and TBR believes HP will drive hyperconverged platforms sales growth as it leverages the technology to address enterprise virtualization demand.
In August, HP bolstered its hyperconverged portfolio with the launch of its CS 250-HC StoreVirtual solution. TBR believes HP’s increased focus on its CS StoreVirtual hyperconverged solutions will accelerate time to market and enable the company to approach customers with a clear, more unified portfolio. HP’s CS 250-HC StoreVirtual offering is more configurable compared to its existing hyperconverged platforms. Specifically, the platform will be offered starting at a 3-node configuration and scalable up to a total of 32 nodes. TBR believes HP’s flexible hyperconverged platforms configurations will help the vendor accommodate organizations’ unique IT requirements. Additionally, HP’s StoreVirtual VSA Data Protection Shield will enable customers to repurpose existing servers to automatically replicate data, providing significant cost savings.
TBR believes this will be a key differentiator from both major OEMs and niche hyperconverged platforms vendors such as Nutanix and SimpliVity.
HP adjusts PC strategy to boost market share, but profit gains may lag
In 2Q15, HP’s PSG revenue declined 13% year-to-year, as both notebook and desktops sales were impacted by weak global PC demand, extended PC refresh cycles and anticipation of Windows 10. TBR believes HP is having success targeting entry-level PC demand, which is helping the company sustain its market share leadership amid market consolidation and intense competition. As a result, HP’s PC sales mix is increasingly shifting toward lower-priced devices, which reduces ASPs and pressures profitability. Further, HP’s narrowed, focused go-to-market approach with consumer devices like the $199 Stream and $399 x360 has created differentiators for it in a crowded market, and room remains for further erosion of the market share of second-tier vendors.
HP’s commercial PC customer base is also in transition away from Windows 7 and 8 to Windows 10, and HP took steps to protect its enterprise install base. In 2Q15, HP released a full suite of Windows 10 migration services to help enterprises cost-effectively upgrade all of their devices to the new operating system. HP’s Windows 10 services include its HP Test Drive Service, HP Transformation Service, HP Roadmap Service and HP WebApp Accelerator Service for Internet Explorer 11.
While HP will leverage the migration services to compete with Lenovo and Dell, commercial customers are typically slow to upgrade to new operating systems, which will hinder HP’s commercial PC sales in 2H15.
HP worked closely with Microsoft when it designed its 2015 PC product line, so its products were able to take advantage of the new features of Windows 10 on the OS’ launch date. For example, HP’s Pavilion x360 and Spectre x360 notebooks incorporate microphones optimized for Cortana, while their convertible form factors can take advantage of Window 10’s Continuum feature to improve the experience for consumers. TBR believes HP is well-positioned to capitalize on the launch of Windows 10, as its PC portfolio spans entry-level to high-end devices, which enables the company to meet consumers’ varying PC needs.
However, even with a host of new features enabled by Windows 10, a revamped suite of commercial PC services and a more targeted go-to-market approach for consumers, TBR believes HP will be able to only reduce, not halt, the rates at which its PC revenue and profits are declining. Even as HP creates differentiators in the PC market, weakened global PC demand will hamper HP’s strategy to rekindle growth and restore its PC segment as a revenue and profit growth engine.